Teresas Tanning Salon expects annual sales of $175,000, annual fixed cash outlay

Question

Teresas Tanning Salon expects annual sales of $175,000, annual fixed cash outlays are $76,000 a year at each location, variable cash outlays are 20 percent of sales, depreciation is $15,000 per year, and taxes are 32% (of pretax income). Initial outlay for the building is $140,000. The company does its analysis based on a 10-year store life. We believe the business can be sold for $100,000 after taxes (disposal value) at the end of its 10 year lifer. Using an 10% required return, what is the net present value of this venture?

Please rework the prior problem to determine what annual sales volume is needed to generate a net present value of $0? To do this you will need to review the problem in the book and its excel answer. If you do not know how to do a goal seek in excel please consult the help menu or google or other sources (there are many). Remember -- you will need to calculate the net present value in the traditional way first. When you do this you need to make sure that the second year sales references the first year ( plus first year in the formula) You will then need to click on the data tab to access thewhat if box and then click on the goal seek box. To use this function, you will set the npv cell to zero by changing the sales cell in the first year.

Explanation / Answer

intial investment = 140000

annual EBIT = 175000 - 76000 - 0.2*175000 = 64000

cash flow per year = 64000 * (1-0.32) + 15000 * 0.32 = 48320

NPV = -140000 + 48320 * PVIFA(10%,10) + 100000 * PVIF(10%,10)

= -140000 + 48320 * 6.1446 + 100000 * 0.3855

=195457.07

b)

let x be the annual sales volume needed to generate NPV of 0

annual EBIT = x- 76000 - 0.2*x= 0.8 * x - 76000

cash flow per year = (0.8 * x - 76000) * (1-0.32) + 15000 * 0.32 =0.544 *x -46880

NPV = -140000 + (0.544 *x -46880) * PVIFA(10%,10) + 100000 * PVIF(10%,10) =0

-140000 + (0.544 *x -46880) *6.1446 + 100000 * 0.3855 =0

x = 116526.53 or 116527

hence 116527 sales volumes is required for a NPV of 0

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.